Where a landlord assigns the reversion in premises he may apply to be released from the landlord covenants of the tenancy by serving a notice on the tenant under s8 of the 1995 Act. However, an obligation that is personal to the original landlord is not a landlord covenant.

In this case the original landlord agreed to refurbish a building. In the agreement there was a personal obligation to remedy defective works. The agreement also provided that following completion of the works a lease would be granted, which was what occurred. As the obligation to do the works was a personal one the original landlord could not escape liability by serving a s8 notice when it assigned the reversion.

In 1999, the first defendant (as landlord) granted a lease of Wembley stadium to the tenant (claimant) for 125 years. The consideration included a premium and an obligation by the tenant to pay service charge.

In 2001, the 1st defendant transferred the freehold to the 2nd - 5th defendants ("Gideon"). The transfer of the freehold stated that Gideon held the freehold as nominee and trustee for the 1st defendant absolutely.

In 2006, the 1st defendant sought service charges in the sum of £660,831 from the tenant. The tenant argued that it was not liable to pay the monies on the basis that:

The freehold assignment transferred the benefit of the tenant's covenants to Gideon; alternatively

Section 3 of the Landlord and Tenant (Covenants) Act 1995 meant that Gideon alone was entitled to the benefit of the tenant's covenants.

The 1st defendant sought a declaration that it was entitled to the benefit of the tenant's covenants.

Decision

The court granted a declaration in favour of the 1st defendant.

The court held that it was plain from s6(2) of the Landlord and Tenant (Covenants) Act 1995 that the 1st defendant remained bound by the burden of the landlord's covenants in the lease, unless and until released as provided under the Act. Section 6(2) states:

"6 (2) If the landlord assigns the reversion in the whole of the premises of which he is the landlord"

(a) he may apply to be released from the landlord covenants of the tenancy in accordance with section 8;and (b) if he is so released from all of those covenants, he ceases to be entitled to the benefit of the tenant covenants of the tenancy as from the assignment."

It was clear that at no time had the 1st defendant obtained such a release, so that whether alone or with Gideon, if necessary, joined as a defendant, he was entitled to enforce the tenant's covenants in the lease, and to all rents and profits due under the lease.

T had a headlease of 7 shop units (for a term of 99 Years). T granted sub-leases to the sub-tenants. T then assigned the headlease to a third party who disappeared. The assignee failed to pay the rent and the head landlord forfeited. T obtained relief from forfeiture but suffered various losses and detriments as a result of the forfeiture. The sub-tenants sued T under the covenant for quiet enjoyment. Ts answer to the claim was that there was a term in the sub-leases stating that T would not be liable under the covenant after it had disposed of the property. The sub-tenants argued that such a clause would get round the release provisions in sections 6 to 8 of the Landlord and Tenant (Covenants) Act 1995 and so was contrary to the anti-avoidance provision in s25(1).

Held

The argument was rejected by the HL. Lord Nicholls:

"13. sections 6 to 8 of the Act provide a landlord with a means which may result in his being released from the landlord covenants but will not necessarily do so. If the landlord assigns the whole of the premises of which he is landlord he may apply to be released from the landlord covenants of the tenancy. A landlord covenant is a covenant falling to be complied with by the landlord of the premises demised by a tenancy. An application for release is made by the landlord serving an appropriate notice on the tenant requesting a release of the landlord covenant wholly or in part. Where the landlord makes such an application the covenant is released to the requested extent if the tenant consents, or if he fails to object, or if he does object but the court decides it is reasonable for the covenant to be released: section 8."

Thus, a release could be obtained by sections 6 to 8 but that did not prevent the landlord and tenant from agreeing any other mechanism for release as a term of the agreement. And any such term does not 'frustrate the operation' of sections 6 to 8 of the Act so as to fall foul of s25. Lord Nicholls:

"16. . Sections 5 to 8 are relieving provisions. They are intended to benefit tenants, or landlords, as the case may be. That is their purpose. That is how they are meant to operate. These sections introduced a means, which cannot be ousted, whereby in certain circumstances, without the agreement of the other party, a tenant or landlord can be released from a liability he has assumed. The object of the legislation was that on lawful assignment of a tenancy or reversion, and irrespective of the terms of the tenancy, the tenant or the landlord should have an exit route from his future liabilities. This route should be available in accordance with the statutory provisions.

17. Thus the mischief at which the statute was aimed was the absence in practice of any such exit route. Consistently with this the legislation was not intended to close any other exit route already open to the parties: in particular, that by agreement their liability could be curtailed from the outset or later released or waived."

T's case was not overburdened with merit. Indeed, on their face the transactions have the appearance of a scam. However, that did not assist the sub-tenants. Lord Nicholls:

"8. Thus the overall position was that Avonridge received premiums from the subtenants totalling altogether £458,500 in exchange for subleases which from their inception were essentially valueless. They were valueless because by its own act of assignment to a worthless assignee Avonridge could at any time put the subleases in jeopardy of forfeiture. Avonridge could do this without incurring any liability either to the head lessor or to the subtenants. From the outset it was in Avonridge's financial interest to take this course as soon as possible. Avonridge lost no time in doing so.

32. In a period of less than two months [Avondridge] acquired the head lease of seven shop units, granted six under-leases at premiums which gave it a profit of the order of £200,000, and then sold the head lease (for £50,000) to Mr Phithwa. Mr Phithwa himself made a profit of over £20,000 (by granting a seventh under-lease at a premium) and then disappeared without ever paying any rent under the head lease. The unfortunate subtenants have had to pay a heavy price to avoid forfeiture (unless and except so far as they may have been able to pass on that burden to their solicitors)."

The House of Lords therefore had much sympathy with the sub-tenants but it did not help them in the case. This was because the Act did not, on its proper construction, assist them. In any event, the defect in their interests was apparent from the outset. Lord Nicholls:

"21. Nor do the events in this case exemplify a loophole in the Act Parliament cannot have intended. The risks involved were not obscure or concealed. They were evident on the face of the subleases. The sublessees were to pay up-front a capitalised rent for the whole term of the subleases. But clause 6 enabled Avonridge to shake off all its landlord obligations at will. Any competent conveyancer would, or should, have warned the sublessees of the risks, clearly and forcefully."

This decision clarifies some of the confusion as to the ability of an existing guarantor to guarantee an incoming tenant, following the decision of Newey J in Good Harvest Partnership LLP v Centaur Services Limited [2010] EWHC 330 (Ch). The Court of Appeal has made it clear that:

The assignor’s guarantor cannot guarantee the assignee’s obligations under the lease – even voluntarily – such a guarantee will be invalid.

The assignor’s guarantor can guarantee the assignor’s AGA

Facts

In a complex sale and leaseback transaction, K/S Victoria Street (“K/S”) agreed to buy a department store in Wolverhampton from House of Fraser (Stores Management) Ltd (“Management”), a wholly owned subsidiary of House of Fraser plc (“HofF”).

As part of the agreement K/S were to then grant a lease back to Management (for tax reasons), and Management were then to assign the lease within three months to a more satisfactory subsidiary of HofF, and in default the lease was to be assigned to a specific subsidiary – House of Fraser (Stores) Ltd (“Stores”).

HofF was the guarantor of the lease to Management, and the agreement provided that on assignment, HofF would stand as surety of the assignee’s obligations.

The lease was completed with HofF as guarantor, and the lease contained a clause (3.15(F)) that stated:

"Notwithstanding the provisions of this clause where the Tenant is [Management] or any other Group Company of [HoF] consent shall not be required to an assignment of the whole to another Group Company of [HoF] provided [HoF] acts as surety to the assignee Group Company."

The onward assignment to Stores was not completed, HofF and Management maintaining that the provision for HofF’s guarantee was unenforceable. K/S sought specific performance of the agreement.

Issue

The Court of Appeal was asked to consider two questions:

Was the requirement in the agreement, for HofF to stand as guarantor for Stores, void under section 25(1) of the Landlord and Tenant (Covenants) Act 1995?

If the lease was assigned from Management to Stores, could Stores insist on reassigning it to Management under clause 3.15(F) of the lease?

Decision

The Court of Appeal held that the agreement that HofF stand as guarantor for Stores, having stood as guarantor for Management was void and unenforceable under the 1995 Act:

Section 5(2)(a) of the 1995 Act releases the assignor (Management) from its obligations under the lease on a valid assignment to an assignee (Stores)

Section 24(2) of the 1995 Act releases the assignor’s guarantor (HofF) “.to the same extent as the [assignor] is released from the tenant covenant..”

Section 25(1)(a) of the 1995 Act makes it clear that any provision that ‘frustrates’ the operation of section 24(2) of the Act is void: that includes any provision that requires the assignor’s guarantor to take on a liability that it would otherwise be released from under the Act;

As a result, any contractual arrangement (in an agreement, lease, licence etc) which imposes such an obligation, is void; and K/S cannot insist that HofF act as a guarantor for Stores; but it could insist on specific performance of the separate clause in the agreement which required an assignment to Stores. (This ruling was not challenged by the defendants in the Court of Appeal.)

Citation

Lord Neuberger MR at para 21:

"If a landlord could (a) when granting a tenancy, impose an obligation on the tenant's guarantor to guarantee the liability of the assignee in the event of an assignment, and (b) on an assignment by a tenant, enforce that obligation, it would, as a matter of ordinary language, "frustrate" the operation of section 24(2). If it were otherwise, it would mean, for instance, that a landlord, when granting a tenancy, could require a guarantor of the tenant's liabilities, on every assignment of the tenancy, to guarantee the liability of each successive assignee. Such an obligation ("a renewal obligation") would plainly be wholly contrary to the purpose of section 24(2), as it would enable a well-advised landlord to ensure that any guarantor was in precisely the position in which it would have been before 1995 Act came into force."

Additional points

In view of the uncertainty arising from the Good Harvest decision, the Court of Appeal went on to consider:

(1) Whether any guarantee offered by the assignor’s guarantor was always void? The court held that, although it was not commercially attractive and inhibited the parties’ contractual freedom, nonetheless s25(1) of the 1995 Act required that interpretation. In part the court rejected the ability freely to offer a guarantee because of the possibility of argument at a later date as to whether such offer had been made voluntarily or as a result of landlord pressure, and in part that section 25(1) is concerned with the "effect" of an agreement and not the purpose behind it.

(2) Whether the assignor’s guarantor can guarantee the assignor’s AGA? The Court of Appeal has confirmed that the tenant's guarantor can validly guarantee that tenant's liability under an AGA.

(3) Finally, the court looked at whether the assignor’s guarantor could act as guarantor for subsequent assignees even if it could not validly act as guarantor for the immediate assignee. It concluded that this would not be void under s25(1)(a) of the 1995 Act, as it would not have the effect of frustrating the release of both assignor and assignor’s guarantor on the first assignment.

Guarantor’s liability under lease

Consent order

Lee v Sommer[2015] EWHC 3889

Summary

The landlord failed to serve notice on the guarantor under s17 of the 1995 Act. Notwithstanding that fact the guarantor agreed to a consent order for payment of sums under the guarantee on the tenant’s default. When the failure to serve the s17 notice was spotted by new solicitors the guarantor applied to have the consent order set aside.

The attempt failed. It was held that the consent order did not fall foul of the anti-avoidance provisions in s25. As a settlement agreement, it was a genuine compromise of litigation between the parties concerning the recovery of sums under the guarantee.

An assignment by a tenant to its guarantor is void. It breaches the anti-avoidance provisions in s25. As a result any such assignment does not vest the lease in the guarantor and both tenant and guarantor remain bound by their obligations.

Relevant statutory provisions

In outline, for leases granted on or after 1 January 1996, the Landlord and Tenant (Covenants) Act 1995 provides that where the lease has been assigned in accordance with the terms of the lease:

The assignor is released from its obligations under the Act (s5)

The assignor’s guarantor is also release “to the same extent” (s24)

The assignor can be required to enter into an authorised guarantee agreement guaranteeing the performance of the tenant covenants by the assignee (s16)

There is no equivalent of s16 for the assignor’s guarantors

There is a strong anti-avoidance provision (s25)

Facts

The landlord (L) of retail premises let them to a tenant (T) for approximately 25 years. T’s obligations under the lease were guaranteed by G (G).

T went into administration and L granted a licence to assign from T to G, and the deed of assignment was completed on the same date. Also on that date G underlet the premises.

Shortly thereafter, G claimed that although the assignment and underlease were valid, L could not enforce the tenant’s covenants against G relying on the judgment in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904 – see above, in which Lord Neuberger said:

“[a] lease could not be assigned to the guarantor, even where both tenant and guarantor wanted it. Lord Nicholls said in Avonridge [2005] 1 WLR 3956 (see above), para 16, that section 5 was "intended to benefit … tenants … . That is [its] purpose. That is how [it is] meant to operate." So, too, section 24(2) is meant to benefit guarantors. It can therefore be argued that, where the assignor and the guarantor who want the guarantor to guarantee an assignee, or who want the lease to be assigned to the guarantor, such a renewal, or such an assignment, would not "frustrate the operation of any provision of [the 1995 Act]".

T was subsequently dissolved and, L argued, the lease was now vested in the Crown as bona vacantia.

Issues

Whether the Landlord and Tenant Covenants Act 1995 prevents a tenant’s guarantor becoming the assignee of the lease?

If it does, is any such assignment that takes place void, or does the lease vest at law leaving the tenant covenants in the lease, post assignment, void and unenforceable?

Decision

The High Court (Amanda Tipples QC) found for the landlord. The Act prevented an assignment to a Guarantor and the purported assignment was void. The Court considered, in some detail, the comments of:

The House of Lords in Avonridge Property Co Ltd v London Diocesan Fund [2005] UKHL 70 as to the “the mischief at which [the Act] is aimed [ie] the continuation of liability long after [assignment]” and the need to regard of s25 of the 1995 Act as a “comprehensive anti-avoidance provision”;

The High Court in Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWHC 330 (Ch), that a guarantee given by the assignor’s guarantor for the assignee is void; and

The Court of Appeal in K/S Victoria Street, that an assigning tenant’s guarantor cannot be required to guarantee the assignee.

The Court went on to conclude that the 1995 Act prevents a tenant assigning to its guarantor. This was because the “whole thrust of the Act” is to prevent the “re-assumption or renewal of liabilities, whether on the tenant or the guarantor…the guarantor cannot as a result of assignment by the tenant to it of the tenancy re-assume those very same, or essentially the same, liabilities as tenant”.

The argument that the Act allows the assigning tenant’s guarantor to be released as guarantor and then resume liability as tenant on an assignment to it failed as “in practical terms … there is no release at all for [the guarantor] in respect of its liabilities under tenant covenants". In other words, the guarantor is bound to the same extent upon assignment as it was before assignment, and accordingly such an assignment is caught by section 25.

The guarantor’s argument that the lease was valid, but the covenants void and unenforceable as a result of such an assignment was “unbalanced as well as 'emasculated and unworkable’".

The Judge commented “the fact that such a conclusion is unattractively limiting and commercially unrealistic is neither here nor there”.

As the lease remained vested in T notwithstanding the assignment, G’s liability under the guarantee remained intact. That was the case even though the tenant had gone into liquidation and the lease vested in the Crown bona vacantia.

Comment

This is the first case where Lord Neuberger’s obiter comments in K/S Victoria Street - see above - have been followed and provides useful clarification of the impact of T assigning to T’s guarantor.

Where there is an unresolved rent review, the ‘fixed charge’ for the purposes of serving notices under s17 of the Landlord and Tenant (Covenants) Act 1995 is the pre-review rent, i.e. the rent due and payable on each rent payment day.

The additional rent (payable after the completion of the review) is a new and separate fixed charge that becomes “due” under s17(2) on the date of determination of the review. It is not therefore necessary to serve s17 ‘wait and see’ notices within 6 months of each original rent payment date for the undetermined portion of the reviewed rent, as envisaged by the Court of Appeal.

The forms

Form 1: The first notice is more straightforward and is referred to in s17(2), which states that the:

"former tenant shall not be liable under .. the covenant to pay any amount in respect of any fixed charge payable under the covenant unless, within the period of six months beginning with the date when the charge becomes due, the landlord serves on the former tenant a notice informing him - (a) that the charge is now due; and (b) that in respect of the charge the landlord intends to recover from the former tenant such amount as is specified in the notice ..".

Form 2: The second notice is referred to in s17(4) and is designed to deal with the situation where the liability is subsequently determined to be for a great amount than the sum referred to in the Form 1 notice. It assumes service of the first notice under s17(2) and then a further notice under subsection (4) when the greater amount is subsequently determined. An obvious example is where there is an undetermined rent review at the time of service of the Form 1 notice. So far as is relevant, sub-section (4) states:

"(4) Where the landlord has duly served a notice under subsection (2) .. the amount which the former tenant .. is liable to pay in respect of the fixed charge in question shall not exceed the amount specified in the notice unless-

(a) his liability in respect of the charge is subsequently determined to be for a greater amount;(b) the notice informed him of the possibility that that liability would be so determined,(c) within the period of three months beginning with the date of the determination, the landlord serves on him a further notice informing him that the landlord intends to recover that greater amount from him .."

The Form 1 notice contains a paragraph that envisages the possibility of the service a second notice and states as follows:

"There is a possibility that your liability in respect of the fixed charge(s) detailed in the schedule will subsequently be determined for a greater amount. (See Note 4 below.)"

That note states:

"Delete this paragraph if not applicable. If applicable (for example, where there is an outstanding rent review ..) a further notice must be served on the former tenant .. within three (3) months beginning with the date on which the greater amount is determined."

The issue

The issue before the courts was whether a landlord:

May simply wait until the rent is determined after the rent review and then only serve a Form 1 notice; or

Must serve a Form 1 notice at the normal rent payment date (advising that there are no arrears but that the review is ongoing) and then serve a Form 2 notice after the rent review has been completed (as envisaged by paragraph 4 of the notice and the note).

The trial judge and the Court of Appeal held that the latter applied. They said that protective s17(2) notices should be served on the original tenant within six months of the rent payment dates, even though on those dates the tenant was not in arrears and the rent review was still undetermined, and even though serving such protective notices may prove “a burden on landlords and could seem pointless and inconvenient for original tenants” (Lord Justice Lloyd, para 35).

House of Lords

The House of Lords overturned the decision of the Court of Appeal by a 3:2 majority. Lord Scott of Foscote, giving the main judgement, said that in his view s17 contemplated a sum that had become payable but was unpaid, for the recovery of which an action could be brought against the current tenant. Where there was an uncompleted rent review, the rent that became due and payable on each payment day was the pre-review rent. That was the “fixed charge” “now due” for s17 purposes.

The additional rent over the period from the rent review date until the determination of the revised rent was a new and separate fixed charge that became “due” for s17(2) purposes on the date of the determination. Form 1 contained provisions supporting that construction but also provisions that seemed inconsistent with it. In Lord Scott’s view, the draftsman responsible for paragraph 4 had not thought through the implications of his assumption that the additional rent would be part of the “fixed charge” due on each payment date. Lord Scott added that he was not dissuaded from this decision by:

“… the argument that the absence of earlier notice to the original tenant of his accruing potential liability in respect of the additional rent would fail to give the original tenant the protection that the 1995 Act intended …”

because:

“Every original tenant can be expected to know from the contents of the lease that he entered into that the lease contains provision for periodic rent reviews and will know that there will almost invariably be an interval before the revised rent is determined. An original tenant would expect to be put on notice of any default by the current tenant in paying the rent as it falls due for payment and of the amount of the default but would not, surely, expect to be given notice of what is contained in the lease and available for anyone to read. The original tenant would surely not expect to be given notice of a process under which nothing is yet due and in respect of which there is no default on the part of the current tenant.” (para 44)

Lord Hoffmann, concurring with Lord Scott remarked that the view of the Court of Appeal:

“… produces some remarkably silly consequences. For example, as the judge pointed out, whenever there is an overdue rent review, a landlord who wishes to preserve his rights against a former tenant will have to serve a notice saying that nothing is presently unpaid and that he does not intend to recover anything from the former tenant, but that his liability may be determined to be for a greater amount. It is hard to believe that Parliament intended this to happen.” (para 10)

Comment

The majority decision will be welcomed by landlords, though it possibly does not accord with the underlying rationale of section 17. It also means that paragraph 4 of the Form 1 notice, and the Form 2 notice, are now effectively redundant in this context.